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Roadmap to the introduction of a participation exemption to the Irish corporation tax system and technical consultation

14 December 2023


Deloitte recently responded to the Department of Finance’s consultation on the introduction of a participation exemption for distributions and a foreign branch exemption to the Irish corporation tax system. Our overall position is that a move to a full territorial regime (substantial shareholding exemption, participation exemption for distributions, and a foreign branch exemption) will be a positive change to the Irish tax code and will only enhance Ireland’s attractiveness as a location for companies. Adopting such a regime will bring Ireland more in line with other EU Member States and the Pillar Two rules.

Any undue delay, will in our view, put Ireland at risk of becoming a less attractive location with an outdated and inadequate corporate tax regime.

The key recommendations we make include;

  • An Irish participation regime for distributions must be broad and as simple as possible and provide certainty to taxpayers.
  • Any opportunity to simplify the Irish corporation tax code and protect the country’s competitiveness for FDI should be at the forefront in the design of any new tax regime.
  • The current Irish double tax regime provides an effective and de facto exemption. There should be little or no downside or risk to the Irish economy in introducing a participation exemption for distributions. Once the participation exemption is an optional regime any unintended
    consequences following introduction of the regime should be mitigated.
  • The simplistic operation of the exemption available under section 129 Taxes Consolidation Act 1997 (“TCA 1997”) for Franked Investment Income (FII) should be mirrored, albeit with minor variations suitable to a participation exemption for foreign sourced distributions.
  • The participation exemption for distributions should not fully align with the current section 626B TCA 1997 exemption without amendments.
  • The participation exemption should at least include all companies within the scope of the Pillar Two rules, as well as Inclusive Framework countries who have signed up to the OECD BEPS Pillar Two rules, EEA countries, tax treaty countries, and countries that have signed up to the
    Convention on Mutual Administration in Tax Matters.
  • The Irish regime should provide for a full participation exemption with an optional taxpayer election.
  • There already exists many measures in the Irish tax code which protect the Irish tax base, there is no need to introduce specific substance requirements for a participation exemption.
  • The existing anti-hybrid rules should operate in parallel with a participation exemption for distributions.
  • Where the taxpayer applies the participation exemption regime, and the distribution received is exempt from Irish tax, consideration may be needed to appropriately amending the current CFC rules.
  • A move to an optional foreign branch profits exemption will likely result in a similar level of tax take from Irish companies but with reduced time and complexity associated with the preparation of the company’s corporation tax computation and return. A move to such an
    exemption would also bring Irish law in line with that of competitor jurisdictions.
  • Ireland should introduce a foreign source distribution exemption (participation exemption) and a foreign branch profit exemption while simultaneously providing for a broad simplification of the existing double tax relief rules in Schedule 24 TCA 1997.

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